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A pipeline in peril Add to ...

Today’s Mainline can carry 6.5 billion cubic feet (bcf) a day across the country. (That is enough to heat more than 26 million average homes.) Yet in northeastern B.C., at least four groups are working to bring gas to the coast to liquefy it and export it to Asia . Their plans are largely preliminary, but as much as four bcf in exports is being contemplated. Another partnership is looking into converting natural gas to diesel fuel in Alberta or B.C.; that could take a further 0.5 to one bcf. Growth in the oil sands will also suck up increasing amounts in future years.

At the same time, the sudden rise of shale gas from plays like Pennsylvania’s Marcellus is driving major changes in the east. For decades, Alberta gas has been transported through Ontario to the U.S., where it is a major energy source for places like Boston and New York. But in May, U.S. regulators approved a project that will allow gas from the Marcellus to flow into Ontario for the first time. Two other proposals are working toward a similar goal.

They aren’t distant prospects: By 2012, their backers hope they have opened a billion cubic feet of capacity from the U.S. into Ontario.

What, then, will be left for the Mainline?

The Mainline advantage

Being the owner of a federally-regulated piece of infrastructure comes with some downsides. One of them is the need to devote a lot of energy to doing constant battle over how best to run your business. Mr. Girling, the TransCanada CEO, is intimately familiar with the system. For more than a decade, he has been one of the company’s prime figures in negotiating and defending pipeline tolls, or rates. That has meant a lot of time spent testifying before the National Energy Board. Once, he went 11 days straight.

“If you look at any regulated utility, it has these issues associated with it,” he says. “They come in and say, I don’t like this about your rates.”

But, Mr. Girling says, “at the end of the day, the cheapest way of getting their gas day-to-day is on this system.”

This is the central tenet of TransCanada’s argument for the future of the Mainline. It’s one borne out of simple economics. A substantial portion of pipeline transportation costs come from the need to recoup the cost of building it. The undepreciated value of the entire Mainline system is about $6-billion, roughly half of its total construction cost. That works out to just under $700,000 a mile. A new pipeline costs roughly $4-million a mile to build; “we’ve been up to $10-million a mile in congested residential areas – if you can even get it permitted,” Mr. Girling says.

In other words, TransCanada believes new contenders will have trouble competing with its legacy assets. An example: This past winter, some gas from the U.S. Midwest flowed to Southern Ontario by way of Manitoba, taking a several-thousand-kilometre detour around the Great Lakes. Why? “Because new capacity [for a more direct connection] doesn’t exist yet, and trying to build new capacity is tough,” Mr. Girling said. On some parts of TransCanada’s pipe, even if the company were to double its tolls, “it’s still cheaper than a new-build pipeline. Way cheaper,” Mr. Girling said.

Mr. Girling also believes shale gas will actually help the Mainline. North-eastern B.C., he says, has the potential to produce triple the gas volumes being contemplated for LNG export. “That’s where we come in,” he says.

The company has already secured 2.3 billion cubic feet in new contracts between now and 2015 from B.C.’s two major plays. It has a further 2.3 billion cubic feet in requests for service – a less firm commitment – between now and 2020. As a result, TransCanada believes the Mainline will begin to stage a turnaround in 2013 or 2014. It’s possible it’s already happening. Volumes so far in 2011 have exceeded those in 2010, although analysts say much of that is related to the cold winter.

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